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Advanced Quantitative Finance with C++ by Alonso Peña Ph.D

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Credit

In credit derivatives modeling, the underlying is credit risk. Modern methodologies of credit risk measurement can be grouped into two alternative approaches—the structural approach pioneered by (Merton 1974) and a reduced form approach utilizing intensity based models to estimate stochastic hazard rates, pioneered by various authors, including (Jarrow and Turnbull 1995), (Jarrow, Lando, and Turnbull 1997), and (Duffie and Singleton 1999).

Structural models

The structural approach to credit risk assumes that a firm defaults when the market value of its assets is less than the obligations or debt it has to pay. Structural models are, therefore, sometimes also referred to as asset value models. These models look at a company's balance sheet ...

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